Decision impact statement

Luxottica Retail Australia Pty Ltd v Commissioner of Taxation

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Court citation:
[2010] AATA 22
2010 ATC 10-119
75 ATR 169

Venue: Administrative Appeals Tribunal
Venue Reference No: 2007/3489, 3490 and 2009/4027 (AAT) NSD 134 of 2010 (Federal Court)
Judge Name: Mr J Block Deputy President and Mr S E Frost Senior Member
Judgment date: 15 January 2010
Appeals on foot:
Yes.

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2001/8
• MT 2009/D1

Subject References:
apportionment
consideration
discounts
GST
GST-free
GST refunds
frames
mixed supply
prescription lenses
prescription spectacles
value of taxable supplies that are partly GST-free

Précis

Outlines the ATO response to the Tribunal's decision on: the GST treatment of the sale of spectacle frames at a discount conditional upon the purchase of a complete pair of prescription spectacles; and the issue of GST refunds.

The Commissioner has filed a notice of appeal with the Federal Court in respect of the first mentioned issue only.

Decision Outcome

Adverse

Brief summary of facts

Luxottica is the representative member of a GST group including OPSM, Laubmann and Pank, Kays Optical and Sunglass Hut which are retailers of spectacles. The applications for review before the Tribunal related to the group members' supplies of spectacles, which in each case comprised prescription lenses fitted into frames for glasses and sunglasses.

Over the years including the years in question, frames had become fashion items rather than items which purely assisted in delivering the medical benefit of sight correction. Customers would purchase new frames even though their prescription needs had not altered. The Luxottica group therefore, over time, placed greater emphasis on fashion frames and frame discounts in promotions.

During the periods under review, 1 October 2002 to 31 August 2006 ("the earlier period") and 1 April 2008 to 30 September 2008 ("the later period"), Luxottica ran various promotions under which spectacle frames were offered at a discount from the normal selling price (and the discounts offered took various forms), but on condition that the customers acquired not only the frames but also lenses for those frames (that is, an entire pair of spectacles). If a customer wished to buy a frame only, and there was a promotion on foot in relation to that frame, he or she could not take advantage of the discount offered.

It was held out to the customer that the frame was being sold at a discounted price and the lenses were sold without any discount and the price of the complete pair of spectacles was the aggregate of the two amounts. There was no additional charge for fitting the lenses into the frames. At the time of each supply of prescription spectacles subject to the discount promotion, an employee entered details into an electronic accounting system. When doing so in respect of the earlier period, some employees erroneously applied the applicable discount amount to the total price of the prescription spectacles and not against the frames only. GST was accounted for on this basis and a BAS lodged accordingly.

When the error was identified Luxottica sought and obtained a refund of the overpaid GST. On subsequent audit action the Commissioner determined that the discount was properly applied to both the frames and lenses proportionately. Notices of assessments were issued to Luxottica for the earlier period and a notice of assessment of penalty for having a tax shortfall was also issued. Objections were disallowed and applications for review were lodged with the AAT. The amount in dispute was subsequently reduced from $1,894,214 to $50,126.

Further assessments were raised in respect of the later period to encompass other promotions which had been the subject of the earlier period review but which were no longer pressed because of the absence of documentary evidence. Objections were disallowed and an application for review was lodged with the AAT. The amount in dispute was $82,544. There was no penalty amount for the later period as Luxottica had in accounting for the GST in its BAS calculated the GST payable by spreading the promotion discount between the frames and lenses on a proportionate basis in accordance with the Commissioner's view.

The Tribunal directed that all applications be heard together.

Issues decided by the tribunal

The issues before the Tribunal were as follows:

•

One or two supplies

Did Luxottica make one or two supplies in providing frames fitted with prescription lenses?

•

The value of the taxable supply of frames

What is the value of the taxable supply of frames upon which GST is payable?

•

The refund of overpaid GST

Is Luxottica entitled to a refund of overpaid GST?

The Tribunal decided the issues as follows.

One or two supplies

The Commissioner contended that the supply of prescription spectacles was one supply that is partly taxable (i.e. the frames) and partly GST-free (i.e. the lenses).

The applicant contended that it made two supplies - one of taxable frames and one of GST-free lenses.

The Tribunal preferred the view that there is one supply which could be described as a pair of spectacles comprising two components, the taxable frame and the GST-free lenses. It was not apparent to the Tribunal why the transaction should be disaggregated into separate supplies which would have also involved recognition of a third supply of fitting services albeit for no consideration.

The value of the taxable supply of frames

The Commissioner contended on the basis that Luxottica made one supply that the value of the taxable frames is to be ascertained under s9-80.

The applicant contended on the basis that Luxottica made two supplies that the value of the taxable frames is to be ascertained under s9-75.

On the basis that there was one supply, the Tribunal found that the relevant provision was section 9-80.

Under section 9-80(1) the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents.

The value of the actual supply (in this case the prescription spectacles) is worked out in accordance with the formula in ss9-80(2). That formula apportions the price of the actual supply as between its taxable and non-taxable components in accordance with their respective values to arrive at the value of the actual supply.

As the discount on the frames was conditional upon the purchase of a complete pair of spectacles (referred to by the AAT as the 'conditionality issue'), the Commissioner contended that the discounted frame price was not a reasonable measure of the value of the taxable frames in calculating the taxable proportion. Rather the value of the taxable frames and the GST-free lenses should be determined having regard to what each part would have been supplied for if supplied separately such that the discount is apportioned across the frames and the lenses proportionately in determining the value of the actual supply. The Commissioner referred to the Food Supplier case in support.

The applicant contended that the value of the frames should be its discounted price, with the effect that none of the discount is apportioned to the lenses.

The Tribunal rejected the Commissioner's submission that the undiscounted frame price had any role to play in the calculation of the taxable proportion.

The Tribunal found in the context of this case, commonsense dictates that the taxable proportion is to be calculated by dividing the GST exclusive discounted frame price by the GST exclusive actual selling price of the spectacles.

The Tribunal considered that this method of calculating the taxable proportion was correct because:

(a)

there are sound commercial reasons for the discounting of frames;

(b)

there is no commercial imperative for the discounting of lenses;

(c)

there is nothing contrived or artificial about the pricing methodology adopted by Luxottica in its promotional arrangements.

The Tribunal also considered that the 'conditionality issue' did not undermine the reasonableness of the calculation of the taxable proportion based on the discounted price of the frames.

The Tribunal commented that 'where the prices of the taxable and non-taxable components are known, the formula in s 9-80(2) presents an unnecessary complication, for, once the taxable proportion is calculated from the known prices, the remaining arithmetic in the formula necessarily leads to the striking of a value of the taxable part of the supply which is equivalent to ten-elevenths of its price. This tends to suggest that the formula in s 9-80 need not be resorted to in cases where the prices of the components have been separately established (subject always to the qualification that there is no suggestion of tax avoidance or sham).'

The Tribunal distinguished this case from the Food Supplier case. It found that in this case there were two components and each component had an agreed price which was in no way artificial or contrived. By contrast, in Food Supplier there was one undissected price in respect of the supply of two items.

The refund of overpaid GST

The Commissioner contended that in the event that the Tribunal decided the value of the taxable supply issue in favour of Luxottica, the restriction on GST refunds (section 105-65) applied to the earlier and later periods. In particular the Commissioner contended that:

•

an amount of GST was overpaid by Luxottica (subparagraph 105-65 (2))a)(i)) - the amount remitted exceeded what was legally payable in respect of the supply of frames in the earlier and later periods;

•

the amount was overpaid because the supply of frames was treated as a taxable supply to a greater extent (paragraphs 105-65 (1)(a) and (b)); that greater extent was in respect of the GST payable on the frames which had been calculated on the basis of a higher taxable proportion; and

•

the Commissioner was not satisfied that Luxottica had reimbursed a corresponding amount to the recipient of the supply.

However, the Commissioner accepted that the residual discretion afforded by the expression in s105-65(1) that 'the Commissioner need not give you a refund of an amount' should be exercised in respect of the later period to allow a refund of overpaid GST of $82,544.

The applicant contended that the criterion in paragraphs 105-65 (1)(a) and (b) was not met as there was an equivalence between the "extent" to which the supply was treated as a taxable supply (paragraph(a)) and the extent to which it was, in fact, a taxable supply.

The Tribunal preferred the view of the Commissioner that the extent to which the frames is a taxable supply takes into account the calculation of the GST payable and therefore the requirements of paragraphs 105-65(1)(a) and (b) were satisfied.

The Tribunal found as a matter of fact that the customer had not been 'reimbursed' to the extent of the overpayment.

The Tribunal having found that the requirements of section 105-65 were satisfied considered whether the residual discretion to pay the refund to the applicant should be exercised.

It was agreed by the parties that the residual discretion should be exercised in respect of the later period. The overpayment was made by Luxottica when it adjusted its BAS to account for GST on a basis that accorded with the Commissioner's view that the promotion discount was to be apportioned between the frames and the lenses.

The Tribunal found that the residual discretion should also be exercised in respect of the earlier period because it could see no reason in principle why the earlier period should be treated any different from the later period, the applicant having accounted for GST in both periods in the manner for which the Commissioner contends for.

The Tribunal also reasoned that:

•

a reimbursement of the customer would have the effect of reducing the selling price of the spectacles and the customer would, in net terms, pay less than he or she contracted with the applicant to pay.

•

any reimbursement amount would need to be allocated, in some way, to the separate components of the supply - the frame and the lenses and this would necessarily cause an adjustment to the price (and, hence, the value) of the frame component, with a consequent adjustment to the GST amount payable on the transaction. This, in turn, would lead to a need for a further reimbursement, despite their having found that the GST payable should be calculated on the contracted selling price.

•

such a process of reiterating prices, values and GST payable has no place in a taxpayer's compliance with GST as a "practical business tax"

•

any reimbursement to the customer would result in a windfall flowing to an undeserving customer.

ATO view of Decision

One or two supplies

The Tribunal's preferred view that there was one supply, described as a pair of spectacles comprising two components, is consistent with the Commissioner's approach based on GSTR 2008/1.

The value of the taxable supply of frames

The Tribunal found section 9-80 applied in working out the value of the taxable supply of frames. This is also consistent with the Commissioner's view as set out in GSTR 2001/8.

In applying the formula in section 9-80, the Tribunal found that the taxable proportion is to be calculated by dividing the discounted frame price (less GST) by the actual selling price of the complete pair of spectacles (less GST) because:

(a)

there are sound commercial reasons for the discounting of frames;

(b)

there is no commercial imperative for the discounting of lenses;

(c)

there is nothing contrived or artificial about the pricing methodology adopted by Luxottica in its promotional arrangements.

Also the conditionality issue did not in the view of the Tribunal undermine the reasonableness of the calculation of the taxable proportion in this way.

The Tribunal rejected the Commissioner's submission that the undiscounted frame price has any role to play in the calculation of the taxable proportion and that the conditionality issue impacted the calculation of the taxable proportion. The Tribunal also distinguished the Food Supplier case.

The Commissioner respectfully disagrees with the reasoning of the Tribunal in support of this finding and has appealed this aspect of the decision to the Federal Court, with a view to obtaining greater certainty regarding the application of section 9-80.

The refund of overpaid GST

While, with respect, not agreeing with all of the reasoning of the Tribunal in relation to the application of section 105-65, the ATO accepts that the decision of the Tribunal was open on the facts as found by the Tribunal. Accordingly, the Commissioner has not appealed this aspect of the decision.

The Commissioner will set out his final views regarding section 105-65, taking into account the reasoning in this case, in the final version of draft ruling MT 2009/D1. In the meantime, the following preliminary comments are provided.

The approach of the Tribunal in determining whether a supply was treated as a taxable supply to any extent (paragraph 105-65(1)(a)) and whether a supply is not a taxable supply to that extent (paragraph 105-65(1)b)) is consistent with the Commissioner's views as set out in the draft ruling MT 2009/D1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953.

The Tribunal also agreed with the Commissioner that the words 'need not', in the context of section 105-65, do not prohibit the giving of a refund even if the criteria in subsection 105-65(1) are satisfied. The Commissioner (and the Tribunal) has a 'residual discretion' to pay a refund in appropriate circumstances.

Both parties agreed that the overpaid GST in respect of the later period was paid by Luxottica when it adjusted its BAS to account for GST on the basis of the Commissioner's contention. The Tribunal accordingly exercised the residual discretion to refund the overpaid GST ($82,544) to Luxottica.

The Tribunal considered that it should also exercise its discretion in respect of the earlier period. The Tribunal considered that on the facts as found there was no reason in principle to distinguish between the earlier and later periods. By erroneously entering the discount into the accounting system to apply to the total price of the prescription spectacles, Luxottica also accounted in the earlier period for GST in the manner for which the Commissioner contends.

The Commissioner accepts the decision of the Tribunal was open to it on the particular facts of this case as found by the Tribunal. While, with respect, the Commissioner does not agree with all the reasoning used by the Tribunal to arrive at their conclusion to exercise the discretion, the exercise of the discretion based on the facts as found by the Tribunal is consistent with examples of arithmetic errors made in the preparation of the BAS contained in MT 2009/D1.

The Tribunal also considered that a failure to exercise the discretion would mean there would be a windfall to the 'undeserving customer' because the customer would pay less than he or she had contracted to pay.

GST is an indirect tax, a central characteristic being that the entity liable to remit the tax is not the entity which ordinarily bears the burden of the tax. GST is generally a foreseeable cost which is usually passed on to the recipient as part of the sale price. In this context the Commissioner considers that section 105-65 is about ensuring that a refund of overpaid GST is not made to a supplier where it may result in a windfall gain to the supplier where the burden of the tax has been borne not by the supplier but by the recipient of the supply. Reimbursement of the customer prevents this from occurring. It is the Commissioner's view that in those circumstances there would be no 'windfall' to the customer.

The reference by the Tribunal to a windfall to an undeserving customer may therefore be understood in the context of the findings of the Tribunal which indicate that the customer did not in fact bear the burden of the overpaid amount. The burden of the overpayment was borne by Luxottica.

The Tribunal further reasoned that any reimbursement amount would need to be allocated, in some way, to the separate components of the supply - the frame and the lenses - and this would necessarily cause an adjustment to the price (and, hence, the value) of the frame component, with a consequent adjustment to the GST amount payable on the transaction. This, in turn, would lead to a need for a further reimbursement, despite their having found that the GST payable should be calculated on the contracted selling price. Such a process of reiterating prices, values and GST payable has, the Tribunal indicated, no place in a taxpayer's compliance with GST as a "practical business tax".

The Commissioner respectfully disagrees that this reasoning leads to the conclusion that the discretion must be exercised in favour of the taxpayer. Section 105-65 contemplates that the GST implications of an overpayment will be resolved by a refund being paid where the overpaid amount is reimbursed to the recipient of the supply.

Administrative Treatment

As noted above, the Commissioner has appealed the decision in respect of the application of section 9-80. In relation to section 105-65, the Commissioner will shortly finalise ruling MT 2009/1 and will administer the law in accordance with that ruling.

Implications on current Public Rulings & Determinations

The ATO will consider whether it is necessary to amend GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts when the outcome and reasoning of the Federal Court in relation to the appeal is available.

The ATO will publish its views in relation to section 105-65 when it finalises MT 2009/D1, taking into account the reasoning of the Tribunal in that regard and the comments outlined above.

Implications on Law Administration Practice Statements

None identified.

Legislative References:

A New Tax System (Goods and Services Tax) Act 1999 (Cth)

Taxation Administration Act 1953
Schedule 1

Case References:
Commissioner of Taxation v Reliance Carpet Co Pty Limited
(2008) 236 CLR 342
68 ATR 158
2008 ATC 20-028

ETO Pty Ltd v Idameneo (No 123) Pty Ltd
[2004] NSWCA 368
(2004) 215 ALR 152
2004 ATC 5080
58 ATR 50

KAP Motors Pty Ltd v Commissioner of Taxation
(2008) 168 FCR 319
2008 ATC 20-007
68 ATR 927

Lex Services plc v Commissioners of Customs and Excise
[2003] UKHL 67
[2004] STC 73

Re Food Supplier and Commissioner of Taxation
[2007] AATA 1550
2007 ATC 157
66 ATR 938

Saga Holidays Ltd v Commissioner of Taxation
2006 ATC 4841
64 ATR 602
(2006) 156 FCR 256

Sterling Guardian Pty Limited v Commissioner of Taxation
2005 ATC 4796
60 ATR 502
[2005] FCA 1166
(2005) 220 ALR 550

Travelex Ltd v Federal Commissioner of Taxation
(2009) 178 FCR 434
2009 ATC 20-133
73 ATR 463